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Stephen Anness

Head of Global Equities, Invesco

The Magnificent Seven – the group of supercharged stocks named after the classic Western movie – that delivered such outstanding returns in 2023 generated so much attention you would think it impossible to have beaten the index without owning them all. The fact that some of us did should be hugely reassuring to investors.

Let’s look first at the scale of the challenge. Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla were responsible for 60% of the total return of the S&P 500 Index last year. They are so big, they make up nearly 30% of the index – and a staggering 19% of the MSCI World Index.¹

Active managers, wisely concerned about investing so much of their clients’ money in so few stocks, faced a tough year given the dominance of these stocks. It was especially tough for equity income managers as only three of them – Apple, Nvidia and Microsoft – pay a dividend (though Meta has just started).

So how was a fund like mine able to outperform the MSCI World Index in 2023?

A couple of things helped drive the performance of the Magnificent Seven last year. The obsession with artificial intelligence (AI) was one.

The second was the fact that they had a pretty terrible year in 2022 and were due a correction. This is often forgotten. As figure 1 shows, Tesla shares declined 61% in 2022. Between them, all seven stocks declined on average 40%. Simple maths tells you that if a stock halves in value it has to double just to get back to where it was. At the time of writing, Tesla still has not recovered. Apple, Amazon and Alphabet are there or thereabouts. Only three have made significant progress.

Figure 1 Hotshots? Looking back on the Magnificent 7 in 2022
	Change in share price in 2022	Change between beginning of 2022 and end of 2023
Microsoft	-20.2%	+18.6%
Meta	-60.0%	+11.6%
Alphabet	-31.9%	+2.3%
Amazon	-43.6%	-3.4%
Tesla	-60.9%	-25.2%
Apple	-18.1%	+15.0%
Nvidia	-44.4%	+78.6%

Source: Bloomberg as at 31 December 2023

If the lesson some investors took from 2023 was that a firm focus on mega-cap³ technology companies is the easiest way to make money in the markets, the experience (perhaps forgotten) of 2022 is surely that a one-theme strategy is a high-risk one.

Introducing the Super Seven

 No-one could deny 2023 generated challenging investment conditions, as have the years that preceded it. The decade so far has brought the pandemic, lockdowns, supply-chain disruption, war, rising interest rates, inflation and mounting geopolitical tensions.

As a result, some industries have been operating well above typical demand patterns. Others have been operating well below. In tandem, many of the usual cross-industry relationships have broken down.

In my view, this environment has clearly lent itself to individual stock selection. It has underlined the value of seeking out standalone opportunities rather than merely seizing on fashionable, broad-brush themes.

Crucially, this is likely to remain the case as patterns of demand, supply and consumption gradually reassume an air of familiarity. Even in relatively ‘normal’ times, the merits of diversification cannot be underestimated (as anyone holding just the Magnificent Seven in 2022 can testify).

We can illustrate this by looking at the top-performing stocks in the Invesco Select Trust Global Equity Income share portfolio. Rather than the Magnificent Seven, let’s call ours the ‘Super Seven’ – as shown in figure 2.

We should begin by acknowledging the presence of Microsoft and Nvidia. This demonstrates we are rational rather than determinedly contrarian. We are not afraid to hold any company that looks attractive to us, even if everyone else seems to be holding it as well.

We are also not averse to other tech companies. We also held Besi and Broadcom, both of which are significant players in the semiconductor boom that is underpinning the spread of artificial intelligence. Ultimately, though, we are firm believers in casting our net more widely.

As you can see from our table, the Magnificent Seven averaged a return of 100% last year; our Super Seven delivered 102%.

Figure 2: Magnificent 7 vs Super 7 in 2023 - Share Price Returns
Magnificent 7                   Share Price                                                  Return %			Super 7                                     Share Price                                                      Return %
Nvidia	221.2		Rolls Royce	221.6
Meta	178.8		BESI	125.8
Tesla	91.2		Broadcom	89.2
Amazon	71.5		3i	80.5
Alphabet	50.1		Nvidia2	80.0
Microsoft	48.6		KKR	69.2
Apple	40.5		Microsoft	48.6
Average return	100.3		Average return	102.1

Source: Bloomberg, as of 31 December 2023; returns calculated in GBP terms;

The importance of the bigger picture

Our top performer in 2023 was aerospace company Rolls-Royce. The resumption of international travel, as well as the management turnaround story beginning to take shape, meant it produced a total shareholder return of 221% for the year, matching Nvidia.

The source of our ultimate ‘hidden gem’ is private equity business 3i. We regard its largest holding, Action, Europe’s fastest-growing non-food discount retailer, as one of the brightest companies on the continent. The cashflow generation of this underlying company has been incredible: the payback period for each newly opened store is roughly 1 year. Action currently has more than 2,300 stores and plans to open 400 a year by 2026. We think it could have a 20-year runway for further expansion in Europe alone!

The final Super Seven holding is KKR – a US-based global investment firm that specialises in alternative asset classes. Even our 8^th best performer – Celanese, a highly cyclical chemicals business, quietly outperformed the mighty Apple in 2023. We could equally, therefore, talk about the Epic Eight!

Along with our other holdings, these companies cover an array of sectors. They represent a number of investment styles – specifically, growth, value and quality. They also encompass a substantial stretch of the market-capitalisation spectrum, ranging from mid-caps to mega-caps³,⁴.

The Magnificent Seven was based on an earlier film, Seven Samurai, whose main protagonist, Kambei, solemnly observed: “Danger always strikes when everything seems fine.” These are wise words for investors, not least at a time when it has arguably never been more perilous to let a single theme or small group of stocks dominate a portfolio.

Stephen Anness is lead manager of the Invesco Select Trust plc Global Equity Income share portfolio

Magnificent 7 vs Super 7 – Rolling 12-month performance (% growth)
	31.12.18	31.12.19		31.12.20		31.12.21			31.12.22
	31.12.19	31.12.20		31.12.21		31.12.22			31.12.23
Microsoft	49.2	37.0		52.5		-20.2			48.6
Meta	50.5	29.3		24.2		-60.0			178.8
Alphabet	23.2	27.1		66.7		-31.9			50.1
Amazon	18.2	71.3		3.3		-43.6			71.5
Tesla	20.8	719.5		51.0		-60.9			91.2
Apple	78.9	75.6		35.0		-18.1			40.5
Nvidia	69.4	115.6		127.2		-44.4			221.2
Rolls Royce	-16.5	-52.6		10.5		-24.2			221.6
BESI	74.8	48.9		45.1		-23.2			125.8
Broadcom	38.8	34.6		53.3		-6.0			89.2
3i	42.0	5.5		25.1		-7.4			80.5
KKR	42.8	34.9		85.6		-30.3			69.2
Celanese	31.5	2.5		30.5		-31.9			44.1
Invesco Select Trust Plc Global Equity Income - Ordinary Share Price	22.1	-0.9		24.1		-5.1			18.9
Invesco Select Trust Plc Global Equity Income - Net Asset Value	20.9	2.6		25.9		-0.3			22.6
MSCI World Index (£) Total Return	22.7	12.3		22.9		-7.8			16.8
S&P 500 Index (£)	23.9	13.0		28.0		-9.9			17.8
Source: Bloomberg as at 31 December 2023

  Past performance does not predict future returns

Footnotes

¹ Source: MSCI as at 22 February 2024

² Nvidia held in the portfolio from summer 2022 to April 2023

³ Mega-cap stocks have a capitalization or market value over $200 billion

⁴ Mid-cap stocks have a market capitalization or market value between $2 billion and $10 billion

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

The product uses derivatives for efficient portfolio management which may result in increased volatility in the NAV. In addition, some companies are suspending, lowering or postponing their dividend payments, which may affect the income received by the product during this period and in the future.

The use of borrowings may increase the volatility of the NAV and may reduce returns when asset values fall.

The product invests in emerging and developing markets, where difficulties in relation to market liquidity, dealing, settlement and custody problems could arise.

Important information

All information correct as at 22 February 2024 unless otherwise stated.

Current tax levels and reliefs may change. Depending on individual circumstances, this may affect investment returns. If investors are unsure if this product is suitable for them, they should seek advice from a financial adviser.

This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.

Views and opinions are based on current market conditions and are subject to change.

For more information on our products, please refer to the relevant Key Information Document (KID), Alternative Investment Fund Managers Directive document (AIFMD), and the latest Annual or Half-Yearly Financial Reports. This information is available on the website. www.invesco.com/uk/en/investment-trusts.html.  

Further details of the Company’s Investment Policy and Risk and Investment Limits can be found in the Report of the Directors contained within the Company’s Annual Financial Report.

Issued by Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire, RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.

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